All Commentary
Thursday, November 1, 1962

The Social Security Program: Twenty-Five Years of Trial And Error

Thirteen thousand beneficiaries of the Anthracite Health and Wel­fare Fund were advised early in 1954 that future pension and death benefits would be cut to half their former rate. Retired miners thus found that insecurity may be the penalty for reliance on a poorly funded promise.

The income for the pension fund was declining, due to a steady drop in hard coal production—from 69 million tons in 1930, to 31 million in 1953, to 19 million in 1960. This happened during a period of general industrial ex­pansion simply because labor, capital, and managerial ability could be more profitably employed in the production of something other than hard coal. The pension fund royalties, added to the price of coal, are, in effect, a special tax upon a product which has to compete with other fuels for a market outlet.

From a national point of view, it might not seem important what happens to the Anthracite Health and Welfare Fund or to its rela­tively few beneficiaries. But that is not to deny the force of the blow to certain individuals. Nor should it obscure the lesson for every other person in the United States. Lack of current revenue to maintain the promised rate of benefits is the disaster in store for the beneficiaries of any poorly funded pension plan, whether it be privately or “publicly” financed.

Some advocates of broadened social security coverage viewed the collapse of the anthracite fund as further evidence of the need to expand the federal program. But such a conclusion is unjustified. The failure of the security pro­gram for hard coal miners stands as a warning against every prom­ise that rests upon a questionable claim to the property or future productivity of other persons.

There are no competitive industries in the United States today which have been guaranteed a prosperous future. No company, nor any industry, controls the buying whims of consumers or the forces of competition. The open market allows individuals and even whole industries to fail—if and when capital, labor, and managerial resources are either pushed or pulled toward more attractive employment opportuni­ties elsewhere.

Investment of savings in pro­ductive private enterprise is the traditional method of achieving retirement security in the United States. Successive generations of farmers have worked to build ownership equity in land, build­ings, equipment, and livestock, fi­nally to retire upon the income which younger farmers would of­fer for the use of that accumu­lated capital. Other persons have achieved old-age security through ownership of rental housing, busi­ness facilities, and other produc­tive property that has value be­cause someone else has use for it.

It is true that ownership of property involves the risk of loss. The property may wear out, be destroyed, or otherwise lose its value, affording less security than the owner expected. Yet the econ­omic progress so well demon­strated in America attests to the advantages of saving and build­ing ownership equity in produc­tive private property. Such prop­erty enhances personal produc­tivity, which helps to satisfy hu­man needs.

Possible gains from the use of more and better tools far out­weigh the risks of possible loss of savings. Knowing this, most American citizens would stand in stanch defense of rights to pri­vate ownership and control of property if the issues were clearly drawn. Yet this deep-seated sub­conscious respect for property rights may be overridden at times by the highly humanitarian and emotional appeal of an illusion such as the social security idea.

No Safety in Numbers

Much of the popularity of the social security program, as it has been operating in the United States, rests upon the false prem­ise that it is a form of old-age insurance with death benefits for survivors—just like annuities or life insurance policies sold by pri­vate insurance companies. Many employees who pay social-security taxes apparently believe that they are putting away a savings fund and that any promised retirement benefits will simply be a part of their own savings coming back to them. They seem to believe that the promise of a pension under the program is quite as secure and has as much value as the pros­pect of future income from per­sonally owned and controlled pri­vate property. And the experience of some of the early beneficiaries leaves the impression that here is a far less costly thing than pri­vate insurance coverage—almost like something for nothing.

Suppose a man, aged 50 at the time the program began, had paid the maximum tax from 1937 until his retirement in 1952. In those 15 years he would have paid $489. His employer would have matched that amount, bringing their com­bined total to $978. Under the law at that time, he and his wife could have begun collecting at the rate of $102.80 a month, thus re­ceiving within 10 months more than he and his employer had paid in social security taxes during the 15 years. Yet, his life expectancy would have been about 13 years. So, he’s probably still living and still collecting—but not from any fund that he himself had helped build.

Or, suppose he had been only 40 when the program began, and had paid the tax at the maximum rate for 25 years until he retired at the end of 1961. The tax has been increasing, from 1 per cent on $3,000 of wages in 1937 to 31/8 per cent on $4,800 in 1962—from $30 the first year to $150 in 1962. But in 25 years the most he could have paid was $1,435, matched by his employer to bring their total to $2,870. He and his wife now would collect at the rate of $190.50 a month; so it would be almost 15 months before he got back as much as he and his employer had paid in taxes.

By what twist of logic or of morality does any person expect to get back several times the bene­fits for which he has paid? At whose expense, and why? Many of the 16,000,000 people now receiv­ing social security old-age benefits established their legal eligibility with far less than the maximum tax payments just mentioned. Is it any wonder that some persons look upon it as a great insurance bargain?

Not Like Insurance

The truth, however, is that so­cial security is not insurance at all in the economic sense of the word. The value of private old-age or life insurance protection stems from the insured person’s owner­ship equity in productive prop­erty. But the payment of one’s so­cial security tax entitles him to no more ownership equity in prop­erty than does the payment of a liquor tax, tobacco tax, gasoline tax, income tax, property tax, sales tax, luxury tax, poll tax, or any other kind of tax.

In the case of Nestor v. Flemming, the United States Supreme Court on June 20, 1960, clearly ruled that social security is not insurance upon which a deported alien could collect, even though he had paid the tax. Secretary Flem­ming declared in his brief on the case: “The contribution exacted under the Social Security plan is a true tax. It is not comparable to a premium promising the pay­ment of an annuity commencing at a designated age.”

Unlike private insurance, the protection afforded by the social security program rests upon the willingness and ability of govern­ment officials to authorize future appropriations from future tax revenue. The so-called fund has not been invested in productive property. In place of the money collected to go into the fund, there are receipts saying in effect that the government used that money to meet current operating ex­penses of one kind or another. These government bonds held in the fund can only be redeemed in valuable goods or services as any other government bonds are re­deemed—by future levies against the private property and produc­tive efforts of individuals. Who can say now what the real value of a government bond will be to the next generation of taxpayers who may be asked to redeem it in goods and services?

A bond is a form of indebted­ness or a liability on the part of the person who issues it. It is the asset of the person who holds it for redemption. The distinction between an asset and a liability involves the question of who owes what to whom.

If a private insurance company holds a government bond, that is an asset. It would be absurd for the company to issue and hold bonds of its own, claiming them as an asset, for they would also be a liability. The solvency of the social security fund is not affected, one way or the other, by its hold­ing of bonds as evidence that the government is indebted to itself.

Redemption Through Taxes

A governmental promise is a promise, whether backed by a bond, or by a social security ac­count, or by a whole pyramid of promises, one upon another. To cancel or destroy the bonds held in the social security fund would not change anyone’s equity in any­thing. The government’s promise of a pension has value only be­cause the government holds the power of taxation—not because it issues bonds or makes promises. The validity of social security claims against future taxpayers would not be changed if there were a thousand times as many bonds in the fund as at present—or if there were no bonds in the fund at all.

Inasmuch as the redemption values of all government bonds, social security benefits, and other government promises of future de­livery are contingent upon the future collection of taxes, it must be seen that each added bond or promise tends to weaken the fi­nancial position of the govern­ment. There is a limit to the tax burden future generations will be willing and able to bear.

The Inflation Tax

Actually, the mushrooming of government promises of future de­livery is a form of current taxa­tion—a method of dipping into private savings—commonly known as inflation. When the govern­ment sells one of its bonds, or col­lects the social security tax, it ob­tains a given amount of real pur­chasing power from individuals. The dollars with which the gov­ernment eventually redeems its promises lose purchasing power in proportion to the volume of such outstanding promises. Meanwhile, all other promises payable in dol­lars, including the dollar obliga­tions contracted by individuals, also lose their purchasing power. This encourages private spending and discourages saving and pri­vate capital formation. Inflation is a subtle and destructive method of taxation. And the social se­curity program is a part of that destruction of private enterprise in America.

That harsh decision back in 1954, which halved the returns to beneficiaries of the Anthracite Health and Welfare Fund, was forced by the fact that declining productivity necessarily means a lower standard of living. Likewise, when the day comes that Ameri­can taxpayers will no longer toler­ate a tax burden which robs them of incentive to produce and earn and save, then someone must bear this sad news to social security beneficiaries: “Lack of tax rev­enue precludes our fulfillment of the poorly funded promises of pre­vious administrations.” The most probable political solution will be to let inflation eat away the value of the promised pension dollars. In other words, the dollars may be paid as promised, but benefi­ciaries will find little security value in those weakened dollars.

It may be argued, of course, that no aspirant for political of­fice would dare renege on such promises to the old folks. But, eventually the citizens who work for a living may resent having their earnings treated as the property of the government. Per­sons paying social security taxes are certain to outnumber those receiving benefits at any time in the foreseeable future. If the ma­jority of voters should decide that social security isn’t worth what it costs, politicians will have no choice in the matter.

A Threat to Property Rights

Those who urge expansion of the social security program seem to assume that American citizens are no longer interested in the preservation of private property—the protection of the human right to own and control the use of that which one has produced. This is not to suggest that social security is the only threat to private prop­erty in the United States. There are many others. But this threat is unique in that it encourages the victim to believe that he still re­tains some kind of a personal claim or right to repossess property which the government has taxed away from him.

If rats destroy 61/4 per cent of a man’s property, he sees that it is a loss of property and not a sav­ings program. Yet somehow it is presumed to be a form of saving when the government takes and consumes the property. Or else it is presumed that the government actually does store and save the property taken in the name of so­cial security. Either presumption, of course, is entirely without basis in fact. Yet, some persons, who will strongly resist socialism inthe form of steel-mill seizures or nationalization of the railroads, have convinced themselves that government control of property affords better old-age security than could be attained in any other fashion.

One other feature of the social security program tends to conceal the nature of its threat to prop­erty rights. The payroll-withhold­ing of the tax makes it difficult for the individual to recognize that it is his own property which is being taken from him. If the wage earner isn’t even allowed to see his money, how can he see that he might have used those with­holdings to purchase property which could yield him a retirement income?

The deception is aggravated, of course, by the employee’s impres­sion that half of the cost is com­ing out of the pocket of his em­ployer. But the employer is ob­liged to treat those matching con­tributions as part of the cost of labor. If that 31/8 per cent were not taxed out of his pocket, then competition would have drawn it out anyway, either in the form of higher current wage rates to em­ployees or in the form of lower prices to consumers. So the net result is that the employee, in reality, stands the burden of the full social security tax, including the share he might have thought the employer was paying. The so­cial security program is not a method of soaking the rich to help the poor. Social security is a feature of the broad socialistic pattern—a special feature de­signed to get at the private prop­erty of the man who works for an hourly wage.

Earning Power Is Private Property

Far too many American citizens have taken the attitude that de­fending private property is the rich man’s job; let him worry about his property rights! But such a shortsighted view misses the vital point that an individual’s earning power is also a form of private property, particularly to be cherished and defended by those who own nothing else. To endorse a principle which allows the government to tax away in­creasing proportions of privately owned property is to forfeit the only chance man has for inde­pendence. To the extent that gov­ernment can take a man’s prop­erty, including his wages and other current earnings, it can con­trol his life. The person who de­sires freedom is obliged to limit the scope and power of his gov­ernment.

The social security tax was ini­tiated in 1937 at the compara­tively low level of 2 per cent of an employee’s wages, the employer and the employee each to bear half of the amount. By January 1, 1962, the total tax had risen to 61/4 per cent, which is still low in contrast with some of the pre­vailing corporate and personal in­come tax rates. It may be recalled, however, that the early advocates of income taxes also scoffed at the idea that such taxes could ever amount to as much as 10 per cent of a person’s income. The ironic truth is that federal income tax rates have “progressed” upward to take as much as 92 per cent of personal income in some in­stances.

A further truth is that a tax of 614 per cent of taxable payrolls barely begins to cover the poten­tial claims which are accumulating under the social security program. Latest plans call for successive future increases until the rate reaches 91/4 per cent on taxable payrolls in 1968. By then, there is likely to be one person over 65 years of age for every five of those younger persons who are supposed to be productively em­ployed—and taxable. Will 914 per cent of the wages of five persons—46% per cent of an average wage—be enough to keep one per­son comfortably in retirement?

A tax of 91/4 per cent of $4,800 comes to $444 a year. Any reliable insurance agent can tell you that would buy a sizable chunk of old‑ age insurance from his company—particularly if you happen to be a young person. For a premium of $444 a year from age 20, a man can secure from private com­panies a life annuity averaging about $220 a month after he reaches 65. This is in contrast to the monthly benefit of $127 prom­ised through social security. Even the government actuaries have acknowledged that a new entrant is scheduled to pay $1.69 in social security taxes for every $1.00 promised in benefits. When buy­ing government security, it’s not a good deal to be a young person.

Compulsory Security

There is a certain plausibility in the rationale that persons most likely to be dependent in their old age should be obliged to help foot the bill during their productive years. Such reasoning, of course, presumes it is the government’s responsibility to relieve the con­sequences of poverty. From such plausibilities, individuals are drawing the conclusion that they have a right to retire at age 65, with no further personal respon­sibilities for earning a living. If this is accepted as a general prin­ciple, then how does a society stop short of complete socialization?

Compulsory social security forces a person to invest a por­tion of his earnings in a “busi­ness” which reports a debt of more than a quarter of a trillion dollars and which seems deter­mined to operate at a deficit—the United States government. Little wonder that participation is com­pulsory!

Those who enjoy diversion talk about putting the social security program on a straight pay-as-you-go basis. This is supposed to mean that current benefits would be paid entirely out of current rev­enue, with no pretense at building a fund to cover outstanding com­mitments. But the program, in ef­fect, has always been on a pay-as-you-go basis. Anyone who believes that his social security tax money has been tucked safely away as in a personal savings account is only deceiving himself.

Fully Funded

The alternative to a pay-as-you-go program would involve govern­ment disbursement from goods previously collected and stock­piled as “public property.” This seems to be the alternative fa­vored by persons who want a fully-funded program.

If such a stockpile were ever attempted, the magnitude of the problem may be seen in the fig­ures of private life insurance in the United States. An ordinary rate of return on the total volume of assets owned by all life insurance companies would yield only enough to provide about two and a half million persons with a regu­lar monthly income of $100. At least seven times that number of persons in the United States are aged 65 or older.

Do persons who urge the gov­ernment to cover 17.5 million old folks with a fully-funded social se­curity program understand the implications of such a proposal? The fund for such a program—assuming a monthly pension of $100—would have to yield an an­nual income of nearly 21 billion dollars. In effect, that would mean government ownership and control of about 700 billion dollars worth of the property which previously had been under private ownership—that much property in addition to what the government already owns or controls. In that sad event, it is doubtful that there would be any property income left for private use; the govern­ment would have claimed it all.

Mr. W. Rulon Williamson, the first Actuary of the Social Se­curity Board but no longer in that post, estimated in 1961 that po­tential payments to living OASI taxpayers and their family de­pendents amounted to $1.5 tril­lion—of which the “on-paper” Trust Fund would cover little more than 1 per cent. Yet, some persons still have the audacity to say that social security is like pri­vate life insurance!

To Relieve the Pain

It is not an insurance program at all; it is a method of taxation. Instead of “premiums,” the re­quired payments are designated as social security taxes. That is no secret. Yet there remains some­thing peculiarly deceptive about this particular method of tax col­lection which seems to give satis­faction to many of those who work and pay the tax. Nowadays a di­rect tax that can be recognized as such by the taxpayer is a rather crude and repulsive thing. Prop­erty owners have been taxed so heavily that many of them dislike the tax collector—a situation which can lead to all sorts of po­litical complications. Where the citizens have grown accustomed to the idea of private ownership of property and the right of a man to the product of his own ef­forts, it is not politically expedient for the government to insist upon too much direct taxation. The ma­jority won’t stand for it. Politi­cally, the government may dig heavily into the property of the wealthy few. But just let it try to tax heavily those citizens who con­stitute a voting majority! If the government expects to take a very high proportion of national in­come, it usually will search for methods more ingenious than di­rect taxation. And the social se­curity tax is loaded with inge­nuity.

Wage Earners Must Pay

Government has become very expensive in the United States, currently taking more than a third of the total national income.

When government was less ex­pensive, it was possible to finance it through property taxes or levies against the income from property. But that is no longer true. Less than one-sixth of the national in­come of the United States is de­rived from the returns to capital; the other 85 per cent represents the price paid for labor and man­agerial talent. Therefore, it is clear why the government seeks ways and means of taxing wages. Even if there were no promises of social security benefits, barely half of the other costs of government could be met out of a total con­fiscation of the income from pri­vate property. The only thing left to tax is the current productivity of those who work for wages and salaries.

True, the social security pro­gram is not the only reason why the government finds it necessary to tax wages. But let no one de­ceive himself that there is any way of financing the social se­curity program and similar “bene­fits” from the welfare state ex­cept through proportionately heavy taxation of wages and sal­aries.

When a government scrapes the bottom of the barrel of personal savings and private property, then its final recourse is to the daily production of those who work for a living. The promise of social security is like an anes­thetic which temporarily relieves the pain of those workers whose earnings are being taxed away. But if the patient regains con­sciousness, it will be to discover that the operation took something from him which was vital to life and liberty—destroyed some of his potential as an individual, leaving him more dependent upon government than before.

There is no denying that social leveling has a strong emotional and humanitarian appeal, not only for those who feel weak and de­pendent, but also for many who feel strong and noble. And few will deny the virtue of helping those who want and need assist­ance. But if any person would re­tain the freedom to determine his own needs in life, he must equally defend the freedom of every man to determine in his own way how to help others. The political or coercive route to security is not entirely a primrose path of some­thing for nothing. What starts out as a popular pastime of soak­ing the rich turns into a program of taxing everyone who works for a living. And as socialism ad­vances, the weak and dependent find themselves competing with the youthful and strong who also have been driven by hunger to the public trough. Such competition in sheer desperation is far more ruthless than that which is some­times frowned upon in the open market. When people lose respect for the lives and property of one another, then the weak and de­pendent may expect to be early victims of murder and theft.

A More Hopeful Choice

If the less productive members of a society truly seek security, let them rally to the defense of the freedom of choice and free­dom of action of those who work for a living and who are person­ally productive. Let them volun­tarily deal with one another in a market place kept free of compul­sion. Such voluntary trading di­rects the instruments of produc­tion and the means of economic security into the hands of those most capable of serving all man­kind. It promotes mutual respect for life and property. It stimu­lates every individual to develop his own talents to their maximum productivity. It encourages saving instead of squandering. The free market, and not its displacement by governmental controls, is the only route to the kind of personal security which makes for harmo­nious social relationships.

A feeling of personal security depends upon something more than the legal guarantee of a handout in time of need. Security is an attitude not necessarily sat­isfied by an “equal share” or even by an abundance of material goods and services. To be truly secure is to be without cause for anxiety, and that kind of security stems from the mind of an in­dividual who knows that he has done his very best with what was properly his own. Such security is fed by one’s respect for the rights of others to life and property, a respect upon which is based one’s own claim to those rights.

Though older persons may not serve well in the armed forces, or in defense plants, or in the vari­ous other activities incidental to the support of big government, that need not preclude their being loved and respected as individuals. That is not sufficient reason for a law which tends to put an end to individuality and its expression at age 65. If the young men and women of today’s generation have lost a sense of love and respect for their aging parents, that is some­thing which the government can­not restore through its devices of compulsion. That is a form of in­security which must be borne by parents if they have failed to teach their children to respect the sanctity of the individual and the rights to life and private property.

The same time-weathered code of ethics which advocates honor­ing one’s father and mother rec­ommends respect for the life and livelihood—the private property—of others. To violate any part of that code destroys the meaning of the rest of it. Society cannot en­force a law which guarantees se­curity to the aged by denying the producer the right to the product of his own efforts. The best that society can do is to give the in­dividual a chance to honor and re­spect his elders. This means al­lowing the individual his choice concerning the use to be made of his own life and his own produc­tive efforts. It is possible for an individual to honor and respect others who are tolerant of his freedom to choose. But rare in­deed is the individual who can ex­tract love and honor from others by compulsory means!

Such things as love, respect, honor, and justice in the relation­ships between persons are meas­urable and meaningful only to the extent that individuals voluntarily reject an opportunity to dislike, disrespect, dishonor, or deal un­justly with others. And old-age security also falls into that cate­gory. Since a weak person cannot force a strong person to help him, it would seem wise to put the ap­peal on some basis other than coercion. This means retrieving the responsibility for old-age se­curity from the hands of govern­ment.



The destruction, by whatever means—human stupidity or de­liberate design, political corruption or public apathy, parental neglect or juvenile ridicule—of those moral standards which have sustained men through the ages will, I am sure, spell the doom of the American republic.

The story of the “Garden of Eden” is more than a fable. Im­portant segments of mankind have been there many times. In each instance, the breakdown of moral standards because of man’s unwillingness to take the responsibility of maintaining them was one of the principal contributing factors limiting man’s length of tenure in the “garden.”

Harold N. Young, Liberty and Responsibility

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.